GCC VAT Compliance: A Comprehensive Guide

Written By Akshaya Ashok, Reviewed By Retheesh R S

Published on 20/11/2024

The Value Added Tax (VAT) launched in 2018 has guided in new VAT taxes with a new round of tax reforms in the GCC (Gulf Cooperation Council).The seven members of the Cooperation Council of the Arab States of the Gulf have now implemented VAT, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates (UAE). All these measures are undertaken with a view to diversifying sources of income, stabilise receipts other than oil export earnings, and fostering the growth of the economy. More so and perhaps as a result of the highly complicated guidelines, differing rates , and strict enforcement, it is advisable for firms to engage in business in the GCC region provided they have to adhere to the VAT compliance rules. In the case if compliance failure penalties, fines and loss of reputation can be considered as quite severe penalties. Therefore, GCC VAT compliance understanding is very crucial when it comes to risks that are likely to be encountered by businesses. It assists them to conduct their operations unhampered and excel through their chores. This article provides information on how GCC VAT works and the chief regulations, requirements, and recommendations on compliance from the article.

GCC VAT Overview

GCC countries include the UAE, KSA, Bahrain, Oman, Kuwait, and Qatar signed the Common VAT Agreement in June 2016. They signed this pact to provide the foundation on which AVT could be easily rolled out across the region. The first rollouts were made in 2018 with the UAE and KSA at the forefront Leading Service Providers. This justification started with the need to diversify government revenues for instance in the wake of volatility in the price of oil by introducing the VAT.

• Saudi Arabia embarked on implementing VAT starting from the beginning of the year 2018 at 5% before the standard rate of 15% from the 1st of July 2020.
• UAE implemented VAT on January 1, 2018, also at a rate of 5%.
• Bahrain followed suit on January 1, 2019, with a standard rate of 5%, which was subsequently increased to 10% in January 2022.
• Oman introduced VAT on April 16, 2021, maintaining the standard rate of 5%.
• Kuwait and Qatar have delayed their VAT implementations; however, both are expected to introduce VAT soon.

Standard VAT Rates

The standard VAT rate across most GCC countries is set at 5%, except for Bahrain, which raised its rate to 10% in early 2022. Below is an overview of the present prices: 

VAT Registration Thresholds and Requirements

Each GCC country has established its own thresholds for mandatory VAT registration:

• UAE: The mandatory registration threshold is AED 375,000.
• Saudi Arabia: The mandatory registration threshold is SAR 375,000.
• Bahrain: The mandatory registration threshold is BHD 37,500.
• Oman: The mandatory registration threshold is OMR 38,500.
• Kuwait and Qatar: Specific thresholds are yet to be finalized as their VAT systems are still pending implementation.

Businesses exceeding these thresholds must register for VAT and comply with local regulations regarding tax collection and reporting.

Country-Specific VAT Regulations

UAE VAT Regulations

The UAE implemented VAT on January 1, 2018. The FTA is responsible for managing the implementation of VAT. 

Key features include:

• Standard rate: 5%
• Mandatory registration threshold: AED 375,000
• Exemptions for specific sectors such as healthcare and education.

Saudi Arabia VAT Regulations

Saudi Arabia introduced VAT on January 1, 2018. The regulations include:

• Standard rate: Initially set at 5%, increased to 15% in July 2020.
• Mandatory registration threshold: SAR 375,000
• Introduction of e-invoicing systems for compliance.

Bahrain VAT Regulations

Bahrain implemented VAT on January 1, 2019. Key aspects include:

• Standard rate: Initially set at 5%, increased to 10% in January 2022.
• Mandatory registration threshold: BHD 37,500
• Various exemptions for essential goods and services.

Kuwait VAT Regulations

Kuwait has delayed its implementation of VAT multiple times. While specific regulations are not yet finalized:

• Expected standard rate: Likely to align with the GCC standard of 5%.
• Mandatory registration details are still pending.

Oman VAT Regulations

Oman introduced its VAT system on April 16, 2021. Key points include:

• Standard rate: 5%
• Mandatory registration threshold: OMR 38,500
• Provisions for zero-rated supplies and exemptions are similar to other GCC countries.

Qatar VAT Regulations

Qatar's implementation has been postponed multiple times. Expected features include:

• Anticipated standard rate: Likely to be set at 5%, consistent with the GCC agreement.
• Specifics regarding thresholds and regulations are still pending.

VAT Compliance Requirements

VAT compliance begins with the VAT registration process, which requires businesses to register for VAT if their taxable turnover exceeds the specified thresholds in their respective countries. In the GCC, this typically involves:

• Mandatory Registration: Businesses must register if their turnover exceeds the threshold (e.g., AED 375,000 in the UAE).
• Voluntary Registration: Businesses below the threshold can opt for registration if their turnover is above a lower limit (e.g., AED 187,500 in the UAE).
• Deregistration: Businesses may need to deregister if they cease operations or their taxable turnover falls below the deregistration threshold.

VAT Returns and Payment Deadlines

Businesses are required to file periodic VAT returns detailing their sales and purchases. Key aspects include:

• Filing Frequency: Returns are typically filed quarterly or annually, depending on local regulations.
• Payment Deadlines: Payments of any VAT due must be made by specific deadlines to avoid penalties. For example, in the UAE, VAT payments are due within 28 days after the end of the tax period.

VAT Invoicing and Record-Keeping

Proper invoicing and record-keeping practices are critical for VAT compliance:

• Invoicing Requirements: VAT invoices must include specific information such as the seller's and buyer's details, a unique invoice number, transaction date, description of goods/services, and the amount of VAT charged.
• Record-Keeping: Businesses must maintain accurate records of all transactions, including sales invoices, purchase receipts, and any correspondence with tax authorities. These records should be kept for a minimum period as specified by local laws.

VAT Exemptions and Zero-Rated Supplies

Understanding exemptions and zero-rated supplies is crucial for compliance:

• Exempt Supplies: Certain goods and services may be exempt from VAT (e.g., healthcare and education in many GCC countries).
• Zero-Rated Supplies: Some supplies may be zero-rated, meaning they are taxable at 0% (e.g., exports). Businesses can reclaim input VAT on expenses related to these supplies.

GCC VAT Compliance Challenges

• The structure, Procedures of VAT and the legislations to it
• The complexity of VAT laws across different GCC countries can create challenges for businesses:
• There are always discrepancies between these countries partly because each of them has its regulatory frameworks.
• In the following process of operation, it is often common that there is frequent modification to tax laws, therefore, firms need to conform to the new provisions.

VAT Rate Differences and VAT Exemption across the GCC Countries

Variations in VAT rates and exemptions can complicate compliance:

• For instance, the KSA’s rate is higher (15%) than that of other GCC countries with a rate of 5%, and Oman.
• Companies interacting with several jurisdictions in the GCC need to should be wary of these distinctions.

Language Barriers and Cultural Differences

Language barriers can pose challenges in understanding tax documentation and regulations:

• Non-Arabic-speaking businesses may struggle with local language requirements for registration and compliance.
• Cultural differences can affect business practices and expectations regarding compliance.

Penalties for Non-Compliance

Failure to adhere to VAT regulations can lead to substantial fines. 

• Financial penalties may include fines for late filings or incorrect reporting.
• Persistent non-compliance can lead to audits or legal action from tax authorities.

Best Practices for GCC VAT Compliance

Regular VAT Audits and Reviews

Conducting regular internal audits helps identify compliance issues early:

• Consistent evaluations of financial statements guarantee that all transactions are reported correctly. 
• Internal audits can help prepare businesses for external audits by tax authorities.

Accurate VAT Invoicing and Record-Keeping

Implementing strict invoicing standards is essential:

• Ensure that all invoices meet local requirements to facilitate the smooth processing of claims.
• Maintain organised records to support all transactions reported on VAT returns.

Timely VAT Returns and Payments

Establishing a system for timely submissions is crucial:

• Set reminders for filing deadlines to ensure returns are submitted on time.
• Monitor payment deadlines closely to avoid late fees or penalties.

Employee Training and Awareness

Investing in employee training enhances compliance:

• Regular training sessions on VAT regulations ensure that employees understand their responsibilities.
• Keeping staff informed about changes in tax laws fosters a culture of compliance within the organisation.

VAT Compliance Software and Technology

Utilising technology can streamline compliance processes:

• Implementing VAT compliance software helps automate invoicing, record-keeping, and reporting processes.
• Technology solutions can assist in tracking changes in regulations across different jurisdictions.

Industry-Specific VAT Considerations

Financial Services and Banking

In the GCC, financial services are typically exempt from VAT, meaning banks and financial institutions do not charge VAT on their core services. However, they must carefully manage VAT on related expenses and comply with input VAT recovery regulations:

• Exempt Services: Core services like loans, deposits, and insurance premiums are generally exempt from VAT.
• Input VAT Recovery: Financial institutions can recover VAT on costs related to taxable supplies, but they must allocate expenses accurately between exempt and taxable activities to ensure compliance.

Real Estate and Construction

The real estate and construction sectors face unique VAT implications, particularly for under-construction properties:

• VAT on Under-Construction Properties: In several GCC countries, under-construction property sales are subject to VAT. For instance, the UAE and Saudi Arabia apply a standard rate of 5% on these transactions.
• Zero-Rated Supplies: Certain construction-related supplies may qualify for zero-rating, especially in new building projects. For example, in Bahrain, construction supplies can be zero-rated under specific conditions.
• Exemptions: Completed properties are often VAT-exempt, requiring developers to understand when VAT applies and manage compliance carefully.

Retail and E-Commerce

Retail and e-commerce businesses in the GCC are subject to standard VAT rates and need to adhere to specific VAT rules:

• VAT Collection: They are required to include VAT in the price of the goods and services they offer as in the recent past, the usual rate charged is either 5% or 10%.
• Cross-Border Sales: This analysis shows that e-commerce firms need to adapt to the value-added tax registration thresholds and legal compliances of GCC borders.
• Digital Goods and Services: There are differences in how VAT is applied to digital products, therefore, businesses need to check on the extant laws of each country in regard to the sale of digital products.

Manufacturing and Logistics

Manufacturers and logistics companies have unique VAT considerations due to the nature of their operations:

• Input Tax Credits: Manufacturers can claim input tax credits for VAT paid on raw materials and production expenses. Proper documentation is essential to support these claims.
• Export Supplies: Goods exported outside the GCC are generally zero-rated, allowing manufacturers to recover input VAT.
• Logistics Services: Logistics providers must charge VAT on services unless specific exemptions apply, making it essential to understand the VAT treatment of each type of supply.

Healthcare and Education

The healthcare and education sectors benefit from specific VAT exemptions in most GCC countries:

• Exempt Supplies: Many healthcare (e.g., medical treatments) and education services (e.g., tuition fees) are exempt from VAT.
• Input Tax Recovery: Although these sectors do not charge VAT, they can recover input VAT on certain expenses if they engage in taxable activities.
• Compliance Requirements: Organisations must maintain accurate records to support input tax recovery claims and meet compliance standards.

Conclusion

GCC VAT compliance is controlled and ranges from requirements in relation to rules, registration, record-keeping, returns, and refunds. Non-compliance can result in catastrophic consequences. Also, businesses must treat GCC VAT with priority to ensure compliance and mitigate risks. Reyson Badger offers individualised solutions, proactive support, and strategic direction that allows companies to achieve success. No need to face penalties. Consult Reyson Badger today to protect your business and maximise your GCC VAT compliance.

Written By

Akshaya Ashok

Akshaya Ashok is a content writer specializing in creating content focused on accounting and auditing. With over two years of experience, she has developed expertise in crafting professional content for the financial sector.